Question Details

What is the project's discounted payback


1.	Which of the following statements is CORRECT?

a.	The NPV method was once the favorite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project- profitability.
b.	If the cost of capital declines, this lowers a project- NPV.
c.	The NPV method is regarded by most academics as being the best indicator of a project- profitability, hence most academics recommend that firms use only this one method.
d.	A project- NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project- life.
e.	The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project.


2.	Which of the following statements is CORRECT?

a.	For a project to have more than one IRR, then both IRRs must be greater than the WACC.
b.	If two projects are mutually exclusive, then they are likely to have multiple IRRs. 
c.	If a project is independent, then it cannot have multiple IRRs.
d.	Multiple IRRs can only occur if the signs of the cash flows change more than once.
e. If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.


3.	Projects A and B have identical expected lives and identical initial cash outflows (costs).  However, most of one project- cash flows come in the early years, while most of the other project- cash flows occur in the later years.  The two NPV profiles are given below:

 

Which of the following statements is CORRECT?

a.	More of Project A- cash flows occur in the later years.
b.	More of Project B- cash flows occur in the later years.
c.	We must have information on the cost of capital in order to determine which project has the larger early cash flows.
d.	The NPV profile graph is inconsistent with the statement made in the problem.
e.	The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project- IRR.


4.	Lasik Vision Inc. recently analyzed the project whose cash flows are shown below.  However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC.  The Fed's action did not affect the forecasted cash flows.  By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected.

Old WACC:  8.00%	New WACC:  11.25%
Year		0	1	2	3	
Cash flows	-$1,000	$410	$410	$410

a.	-$59.03
b.	-$56.08
c.	-$53.27
d.	-$50.61
e.	-$48.08
	

5.	Hindelang Inc. is considering a project that has the following cash flow and WACC data.  What is the project's MIRR?  Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:  12.25%
Year		0	1	2	3	4	
Cash flows	-$850	$300	$320	$340	$360

a.	13.42%
b.	14.91%
c.	16.56%
d.	18.22%
e.	20.04%
	

6.	Stern Associates is considering a project that has the following cash flow data.  What is the project's payback?

Year		0	1	2	3	4	5	
Cash flows	-$1,100	$300	$310	$320	$330	$340

a.	2.31 years
b.	2.56 years
c.	2.85 years
d.	3.16 years
e.	3.52 years
	

7.	Fernando Designs is considering a project that has the following cash flow and WACC data.  What is the project's discounted payback?

WACC:  10.00%
Year		0	1	2	3	
Cash flows	-$900	$500	$500	$500

a.	1.88 years
b.	2.09 years
c.	2.29 years
d.	2.52 years
e.	2.78 years
	

8.	Tesar Chemicals is considering Projects S and L, whose cash flows are shown below.  These projects are mutually exclusive, equally risky, and not repeatable.  The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV.  If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV?  Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

WACC:  7.50%
Year		0	1	2	3	4	
CFS	-$1,100	$550	$600	$100	$100
CFL	-$2,700	$650	$725	$800	$1,400

a.	$138.10
b.	$149.21
c.	$160.31
d.	$171.42
e.	$182.52



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